Why Whole Foods' plan to open a cheaper store could backfire

The new chain is meant to fend off growing competition in the organic foods market.

But the cheaper prices could end up hurting Whole Foods’ existing stores, according to Deutsche Bank analysts.

“It could backfire if price points are materially different, because an obvious price spread between the two formats could create doubts with their existing loyal customer base, and this could lead to erosion of their very strong brand equity,” analysts write in a recent research note.

Whole Foods could also face a challenge keeping rent and labour costs low enough to make the “mini-me millennial” stores profitable, according to the note.

“Real estate and labour are both becoming scarcer, which could complicate this endeavour,” the analysts write.

Whole Foods has revealed few details about the new store concept. Based on what little we know, it sounds pretty similar to Trader Joe’s, which sells a curated selection of private-label foods at cheap prices.

Deutsche Bank predicts that the new stores will be about half the size of existing Whole Foods stores and offer prices that are about 10% lower.

Walter Robb, co-CEO of Whole Foods, says the new stores will be “unlike anything that currently exists in the marketplace.”

In describing the new format, Robb said, “Offering our industry-leading standards at value prices, this new format will feature a modern, streamlined design, innovative technology and a curated selection. It will deliver a convenient, transparent, and values-oriented experience geared toward millennial shippers, while appealing to anyone looking for high-quality fresh food at great prices.”

The company said it is building a team solely to develop the stores and negotiate leases. It plans to launch them next year and expects a “rapid expansion” thereafter.

Whole Foods’ reported sales of $US3.6 billion for its most recent quarter, which represented a 10% increase over the previous year, but fell short of investors’ expectations for $US3.7 billion.

The grocery store has earned the nickname “Whole Paycheck” for its high prices. It recently began slashing prices to shed that image and keep up with growing competition in the organic food market.

Organic food sales in the U.S. more than tripled from $US11 billion in 2004 to an estimated $US35 billion in 2014.

A bag of quinoa is $US9.99 at Whole Foods, but $US4.99 at Trader Joe’s. Meanwhile, gluten-free cheese pizza is $US7.49 at Whole Foods vs. $US4.99 at Trader Joe’s, according to dcist.com.

Trader Joe’s sells $US1,734 per square foot, while Whole Foods sells $US930 per square foot, according to a report by the real estate investment firm JLL.

And customers love the Trader Joe’s brand. Consumer perception of Trader Joe’s is significantly higher than Whole Foods Market, according to a YouGov BrandIndex study.

Trader Joe’s is best known for its private-label products that consumers can’t get anywhere else. A whopping 80% of what Trader Joe’s sells are private label. Some of the most popular products include Chilli-Lime Chicken Burgers, Cookie Butter (a cookie-flavored nut butter), and corn and chilli salsa.